As stated in my last article, blockchain creates new ways to distribute economic value. Why is this significant? We live in a world in which content, and the technology with which we consume that content, is increasingly created, operated, and even funded by the people who use it. These community-sourced sites may have started as collaborative efforts—Wikipedia is still largely maintained by volunteers—but it wasn’t long before the commercial prospects became obvious: enter Facebook, YouTube, and Twitter, none of which would exist without content from users. And the sharing economy has now developed even further, with the emergence of platforms like Kickstarter and Patreon, where users can choose to fund specific products and services and gain exclusive access in return.
As user participation progresses in this fashion, the next logical step is what Jesse Walden, Founder at Variant Fund, calls the Ownership Economy, in which platforms are “not only built, operated, and funded by users—but owned by users too.” As blockchain networks and cryptocurrencies use common assets that are shared by all stakeholders, creating value that aligns their economic interests, crypto ecosystems are a natural fit with the ownership economy. In this article I’ll break down how this relationship could develop, what incentives would drive adoption of the ownership economy, and why I believe this process will work.
How would it work?
Think about a co-op, credit union or labor union, which has members buying in and paying dues and getting benefits in return. In the ownership economy, users become owners by consuming a product or putting money or assets into the system. For example, in the context of a financial product, you would put in crypto, which then gets lent out, either as crypto, stablecoin, or converted into fiat. Or you could become a customer by taking out a loan. When you get the loan, you also gain access to a community of members and valuable content.
We envision a mechanism whereby a borrower can invite a guarantor into the product experience to partially collateralize the value of the debt being requested. Without having to sync their bank account in the same way, the guarantor would be prompted to “purchase” some percent of collateral, which would stay managed by the company for the duration of the loan. The collateral instrument would be a token or stablecoin.
In recent years, peer-to-peer (P2P) lending has filled a gap in the financial services landscape: SoLo Funds is just one example of a marketplace connecting borrowers and lenders. Similarly, the idea of using blockchain as a rail to facilitate P2P loans is not new. That said, most businesses that have seen any success in this area have only been able to facilitate loans from one crypto user to another crypto user, as for example in the Compound marketplace.
The complexity emerges when currency is used to facilitate each side of the market, for example if the coinholder owns tokens (as opposed to fiat), but the customer wants fiat (as opposed to tokens). This problem has already been partially solved in the blockchain ecosystem by using “stablecoins” like MakerDAO’s Dai as an intermediary asset.
What are the incentives for using blockchain to spur communally-owned products or services?
Jesse Walden points out that user ownership lies at the core of both Bitcoin and Ethereum, the first user-owned and operated networks to scale. They did so in large part by offering users value—in the form of Bitcoins or Ether, and so ownership stake in the networks—in exchange for participating by “mining” or securing those networks.
Using blockchain to spur the adoption of communally-owned products and services can enable incentivization for good behavior within the system, such as receiving a reduced interest rate in exchange for repaying a loan early. Crypto might also be given as a reward for providing customer referrals or adding more bank accounts to one’s member profile.
The social guarantee of other loans incentivizes on-time repayment: the fact that the guarantor exists places social pressure on the borrower to repay the debt and not damage their social standing or reputation among their peers. This is one of the primary mechanisms used in microfinance. In these examples, crypto serves as a passive investment for members of the system. Members can earn interest, lend and borrow, which helps average people become invested in crypto without requiring them to do any heavy lifting.
Why blockchain-powered ownership?
Blockchain companies could use ownership to open gateways to new markets. Because members on these networks behave like owners, they are more likely to engage with the brand, evangelize the product, create trust, contribute to governance, and obtain a voice.
This last point is especially interesting, as it lets members provide direction with regard to both internal decisions (for example, how should the economics of the market be designed?) and external issues (for example, should an Uber Benefit be directed to a HSA or retirement savings?). Jesse Walden also makes the argument that because the value of ownership can be represented by non-traditional rewards such as platform governance or new forms of social capital, ownership can also “be a new keystone of user experiences, with plenty of design space to explore.”
Blockchain-powered ownership also creates long-term economic alignment. As the collective ownership grows, the company, members and other stakeholders will benefit from the shared financial upside. There is also significant reduction in risk: as users gain a greater financial stake in the success of the collective, they are less likely to engage in risky behavior that will result in loss. In addition, their ownership stake can become collateral against credit facilities, providing the company with lower risk underwriting.
How is cryptocurrency used and valued?
Cryptocurrencies can be used as a proxy asset that reflects the long-term value of the market, and this could theoretically be passed on to customers. Although we’re still at an early stage in the understanding of “crypto economics,” some of the leading theories broadly suggest that a cryptocurrency derives its value from the economic activity happening which is denominated in it, or is indirectly linked to a demand for the cryptocurrency caused by “transactions” happening on the respective blockchain network.
Following this basic theory, we can expect that as use of a specific currency spurs economic activity, the market will apply more value to that currency. As a result, anyone who owns those coins will see their value increase. Of course, this assumes a relatively informed market with rational actors, and this is not always the case in crypto. But the hypothesis still holds, and we expect this will become increasingly true over time. A good example, if you can ignore the speculative noise in crypto that also influences price, is the fact that the price of ETH is steadily increasing in a way that looks correlated to the amount of DeFi activity happening on Ethereum. As more people use Ethereum for economic activity (in this case through DeFi), the price of ETH rises. This can have a massive—and hugely meaningful—economic impact on people who have traditionally been underserved by financial institutions.
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